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- A secured loan is a type of loan that is guaranteed by collateral that you hold, such as: B. your house or your car.
- There are several types of secured loans available, from mortgages and auto loans secured credit cards and secured personal loans.
- Lenders may offer better interest rates and terms on their secured loans, but they also have the right to seize your collateral if you miss a payment or late payment.
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While borrowers take out many different types of credit every day, they all fall into one of two categories: secured or unsecured loans.
Certain types of loans, like mortgages, are always secured loans. But with other types of debt, you may have a choice between secured and unsecured loan options.
Which type of loan is the best? In short, it really depends on your specific situation. In some cases, a secured loan can be a smart choice, but it can also put you at higher risk. Here’s what you need to know.
What is a Secured Loan?
A secured loan is a type of loan that is guaranteed by collateral that you hold. If a borrower defaults on a secured loan, the lender can seize the collateral to minimize their losses. Here are some common examples of secured loans:
- Mortgages: Secured by your home or property
- Car loans: Secured by your vehicle
- Secured credit cards: Usually secured by a deposit
- Secured personal loans: Could be secured by a wide variety of financial assets
These are just a few examples of secured loans. But every time you fund the purchase of a physical item, be it a couch or a boat, there is a great chance that you have a secured loan. In any event, the lender has the right to repossess the collateral (in the event that you fail to make a payment) until the loan has been repaid in full.
What can be used as collateral for a secured personal loan?
However, there are ways for a borrower to secure a personal loan. Here are some assets a lender can accept as collateral for a personal loan:
- Home equity
- Savings account or Payment slip
- Vehicle title
- Insurance policies
- Stocks, bonds, and other stocks
- Precious metals
What are the pros and cons of having a secured loan?
Secured loans are less risky for the lender. Because of this, they may be willing to offer you better terms on a secured loan than an unsecured one.
If you opt for a secured loan, you can get one lower interest rate, a higher credit limit or better repayment terms. And if you have a limited or damaged credit history, pledging an asset as collateral can help you obtain a loan approval.
But while secured loans could offer more credit options or more attractive terms, they also pose a higher risk for you as a borrower. If you default on the loan, the bank can hold your house, car, jewelry, or whatever as collateral was used, take it back.
It is also important to note that not all secured personal loans offer better terms or interest rates than their unsecured counterparts. In fact, secured loans aimed at borrowers with poor credit ratings (such as title loans or pawnbroker loans) often require expensive fees and high interest rates.
Should You Pay Off Unsecured Debt With A Secured Loan?
If you are struggling with credit card debt, you might be tempted to get a second mortgage or title loan on your paid off vehicle in order to consolidate your debt at a lower interest rate.
On the surface, this may seem like a solid financial decision. However, in reality, this is a very dangerous step as you would be converting an unsecured form of debt into a secured debt.
While credit card collection agencies can be overwhelming to deal with, they cannot take away your personal belongings without a court ruling. However, once you switch to a secured loan, your collateral is now at risk.
Instead of turning unsecured debt, like credit card bills or medical bills, into a secured loan, try working out a payment plan with the lender. And if you feel you need additional help managing your debt, you can make an appointment with a credit counselor National Foundation for Credit Advice or the Financial Counseling Association of America.
Is Getting A Secured Loan A Good Idea?
In some cases, getting a secured loan can be a wise decision. For example, your bank may offer you a better interest rate and better terms on a home loan than on an unsecured loan. Also, a secured loan can help you restore a damaged credit score.
On the flip side, some secured loans targeting low credit borrowers, such as auto title loans, can charge outrageous rates and fees. Before taking out a title loan, Make sure that you have explored all of your other loan optionssuch as Payday Alternative Loans (PAL) that are offered at
As with any loan, you need to make sure that you can really afford your monthly payments on a secured loan. And make sure you do your research as well Compare Lenders before you choose the right secured loan for you.